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Competition in the energy market ‘works well’, finds CMA

Competition in the energy market ‘works well’, finds CMA

The Competitions Market Authority (CMA) has ruled that “competition in the wholesale gas and electricity generation markets works well” in its provisional findings.

The energy market was referred to the CMA by Ofgem back in June 2014 following huge public pressure over a perceived lack of competition among the ‘Big Six’ and the continuing escalation of energy bills. Despite the CMA possessing the power to break up the Big Six, today's findings have ruled out the possibility.

The CMA has claimed that the “presence of vertically integrated firms does not have a detrimental impact on competition” and as such has found “no strong case for returning to the old ‘pool’ system for the wholesale electricity market”.

However, the CMA has acknowledged a large number of problems that are currently conspiring to constrict competition. The CMA claims that “much of the recent [energy bill] increases are down to increased environmental and related network investment costs”. Adding that “future energy prices will be heavily influenced by decisions being made about investment in generation capacity and renewables”.

The CMA’s assertion that environment and network investment costs are the driving forces behind recent bill rises contradicts Ofgem’s own data which shows that environmental costs represent 6.4% of the average energy bill and network investment costs represent 22.6%. To put those figures into context, wholesale energy costs account for 45% of a current energy bill.

Roger Witcomb, Chairman of the energy market investigation, explained: “We are concerned about the impact of the high cost of low carbon electricity. While absolutely not disputing the need to move towards cleaner forms of energy, the move will have a significant impact on bills, and we need to ensure that the process of bringing clean electricity into the market is carried out efficiently and transparently and at the lowest possible cost.”

The CMA continues by welcoming the government’s recent move to competition-based subsidies for renewables, describing it as a “very positive step”.

The provisional findings released by the authority have also been heavily critical of a number of regulatory interventions that had hoped to simplify the market, namely the introduction of the ‘four-tariff rule’ which the CMA believes has “reduced competition”. A point that Juliet Davenport, CEO of renewable energy provider Good Energy agrees with. She said: “Far too many consumers have never even considered switching to a supplier and the regulation which was intended to make things easier and fairer for them has in fact, made things worse and actually got in the way of competition.

“We’ve ended up with regulation including the four-tariff rule that gets in the way of enabling us to offer the best deal for customers. As a result energy bills now run into several pages and it’s not a surprise customers are disengaged.”

The CMA’s provisional findings reiterate the need for consumers in the UK to actively investigate and switch energy suppliers. However, a lack of awareness of current deals, confusing and inaccurate bills, and the difficulty of switching suppliers and are serving as deterrents to switching.   

Witcomb concluded: “There are millions of customers paying too much for their energy bills – but they don’t have to. Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the majority of us are still on more expensive default tariffs. Many customers do not shop around to see if there’s a better deal out there – let alone switch. The confusing way energy is measured and billed can make comparing deals understandably daunting.

“The result is that some energy suppliers know they don’t have to work hard to keep these customers. It’s notable that there are such high levels of complaints about customer service.

“For the poorest 10%, energy bills make up nearly a tenth of their total spending. So, as well as helping customers become more active, we want to consider carefully whether some sort of protection is warranted whilst other changes take effect. We wouldn’t introduce such a move lightly and would need to consider its effect on competition but it is something we feel is right to look at closely.”